Bankers warn of more failures, especially among smaller banks

Emily Zoladz | The Grand Rapids PressArthur Johnson, chair of American Bankers Association and chairman/CEO of United Bank of Michigan, talks about the financial crisis and proposed regulatory reform Tuesday at Grand Valley State University's Loosemore Auditorium. GRAND RAPIDS -- After a brutal year of bank closings and bad debt in 2009, banker Arthur Johnson warned a Tuesday crowd to expect more bank failures this year, especially among smaller banks.

Johnson was one of four panelists to tackle "Financial Crisis and Proposed Regulatory Reform" at Grand Valley State University. "While it's no fun in our industry right now with the number of troubled banks, the numbers will be up slightly in 2010," said Johnson, CEO of United Bank of Michigan.

FACT SHEET

Congress is mulling a 1,300-page package of regulatory reforms. Here's a sample:

• A Consumer Financial Protection Agency, with power to write and enforce regulations

• Better oversight of financial institutions; quickly evaluate and act on those at risk

• Regulation of non-bank financial institutions

• Loans and mortgages that stay with the issuing bank; a "skin in the game" reform

• More transparency for derivatives, highly leveraged investments based on underlying assets like stocks, interest rates

• Closer scrutiny of ratings agencies

Source: Panel, "Financial Crisis & Proposed Regulatory Reform"

He criticized the "mark to market" system that forces banks to call loans on troubled businesses, even if they're keeping up their payments. Banks have been required to downrate the asset to its "exit value."

"It made the problem much worse, much bigger, than it needed to be," Johnson said. He chairs the American Banking Association this year.

Investment banker Ronald Kruszewski agreed.

"That's a pro-cyclical regulation; you're required to mark an asset down when there's a fire going on," said Kruszewski, CEO of Stifel Nicolaus based in St. Louis.

"It's shorter than the Grand Rapids phone book, but still longer than the Bible," Koning said.

Kruszewski, the investment banker, made a game of the financial mess: Pass the Trash. Buyers wanting too much house, funded by a sub-prime mortgage from an over-eager lender, sold by a banker as a security leveraged 20-, 40-, or 50-to-1, then passed on bearing an AAAA investment grade are among the moves in the game.

"Think about what it is that prevents the game of Pass the Trash," the St. Louis financial executive said. "In Missouri, they're pretty mad. It was financial Armageddon."

He told the crowd of 200 that his biggest worry wasn't derivatives or regulatory reform. It's the national debt.

"I'm concerned that the U.S. not turn into Japan," he said, blaming the long Japanese financial slump on unwise government spending -- "building monuments" that had no return on investment.

He's not against financial reform; he's just opposed to deeper debt for stimulus packages like the $700 billion Troubled Asset Relief Program, or TARP.

"I am for good, smart regulation," Kruszewski replied. "If we don't address this crisis, there's not enough TARP money in the universe to save us in the next one. But there's been nothing done yet, as of today."